Carnival - Time To Be Cautious After Strong Recent Momentum

Investors in Carnival (CCL ) are having a great end to a difficult 2013 following massive public relationship disasters earlier this year and last year's disaster with the Costa Concordia.

Just three months ago, Carnival released its third quarter results which triggered a sell-off at the time. After shares have risen by about 25% in just a quarter of a year, it is time to take some profits.

Fourth Quarter Results

Carnival generated fourth quarter revenues of $3.66 billion, up 2.2% on the year before.

Reported earnings fell by 29.0% to $66 million. Reported GAAP earnings fell from $0.12 last year to $0.08 per share. On a non-GAAP basis, earnings per share fell from $0.14 to $0.04 per share. CEO Arnold Donald commented on the developments during the quarter;

"Fourth quarter earnings on a non-GAAP basis were better than anticipated in the company's September guidance due primarily to better than expected cruise ticket prices and onboard spending for Carnival Cruise Lines."

Looking Into The Results...

Passenger ticket sales were up by 1.4% to $2.70 billion over the past quarter. The company did a better job at growing sales onboard which were up by 3.9% to $929 million. Tour and other tickets rose sharply by some 27% but totaled merely $33 million over the past quarter.

Total tour expenses rose by 30 basis points to 71.6% of total revenues. Lower fuel expenses were more than offset by higher payroll and other ship operating costs. Selling, general and administrative expenses rose by 170 basis points to 14.5% of total sales, resulting in margin pressure.

The company still managed to reported earnings despite the sizable debt position, partially on the back of income tax benefits and a $31 million gain on fuel derivatives.

..And Ahead

First quarter net revenue yields are seen down 3 to 4% compared to a year earlier. Cruise costs, excluding fuel are seen up by 4.5 to 5.5%.

As a result the company expects non-GAAP losses of $0.07 to $0.11 per share, compared to non-GAAP earnings of $0.09 per share in the first quarter last year. Analysts were looking for non-GAAP losses of $0.07 per share in the first quarter.

Valuation

Carnival ended the period with $462 million in cash and equivalents. Total debt stands at $9.56 billion, resulting in a net debt position of $9.1 billion.

Full year revenues for the year came in at $15.46 billion, up 0.5% on the year before. Reported earnings fell by 17% to $1.08 billion.

Trading at $40 per share, the market values Carnival at $31 billion. This values the company's equity at 2.0 times annual revenues and 29 times last year's GAAP earnings.

Carnival pays a quarterly dividend of $0.25 per share, for an annual dividend yield of 2.5%.

Some Historical Perspective

Investors in Carnival have been completely reliant on dividend income, for those holding the stock on a ten-year basis. Shares traded in their fifties in the years ahead of the crisis to fall to lows of $20 during the financial crisis.

Shares recovered and traded in a $30-$40 trading range in recent times, currently trading at the high end of the range. Note that following the third quarter earnings release in October, shares have risen by a quarter in just three month's time.

Between 2010 and 2013, Carnival managed to increase its annual revenues by some 7% to $15.5 billion. Profits took a serious beating in the meantime, being cut nearly in half from the reported $2 billion in 2010 to $1.1 billion last year. To soften the pain somewhat for shareholders, the company bought back shares at a very modest pace across this time period.

Investment Thesis

Carnival has been placed in the spotlights after the Costa Concordia disaster, which ran aground in Italy back in 2012, killing 32 souls. This was followed by mechanical, fire and diseases at other ships being ran by the conglomerate.

This resulted in waning confidence in the cruise sector at large and Carnival, requiring the company to offer discounts and boost marketing efforts to fill the ships. Given the huge operating leverage of these firms, with huge depreciation charges and fuel bills, this has a great effect on earnings. Luckily for Carnival, lower fuel prices and greater fuel efficiency cut the fuel bill to still a very sizable $2.21 billion over the past year.

These efforts have resulted in strong bookings but at lower prices. Yet CEO Donald of Carnival is anticipating both prices and bookings to recover to more normal levels. This is supported by national marketing campaigns and the vacation guarantee.

These signs of a recovery are very important with over 74 million cabins available, 10 million passengers per annum and average revenues of around $200 per berth a day. Even small changes in any of these metrics move the needle in a big way, given the huge numbers. Note that the company operates a huge fleet of 100 ships, sailing with some 77,000 employees and 200,000 guests at any point in time.

As such underlying trends remain solid with volume growth, lower fuel bills and opportunities in Asia and notably in China. Clearly the market has been distracted and impacted by the public relationship nightmare of the past two years. The continued upgrading of new ships, which carry many more passengers compared to older vessels result in grater efficiency and customers experience.

At the end of September, I last took a look at Carnival's prospects following the sell-off resulting from the third quarter earnings release. At the time shares fell to lows around $32 per share on the back of the soft bookings and higher costs. I note that a lack of incidents and growth of Asian operations should boost growth prospects and margins prospects to levels before the public relationship nightmares. Continued investments into more productive and profitable ships are long term tailwinds as well.

At the same I foresaw earnings of around $2.50 per share in 2015, which made the valuation around $32-$33 per share appealing, especially combined with a fair dividend yield, which at the time was above 3%.

I advised to add some shares in the portfolio, but after 25% returns in just three months time, current levels represent an excellent opportunity to take some profits.

Source: Carnival - Time To Be Cautious After Strong Recent Momentum

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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